The TCA provides for a variety of reliefs for corporate restructuring, from capital gains tax (“CGT”) relief on the intragroup transfer of assets under Section 615 TCA 1997 to reliefs on the amalgamation/reconstruction of trading companies under Sections 587/615 TCA 1997. These reliefs are in place so that corporate groups are not penalised for engaging in genuine commercial transactions. However, many of the restructuring reliefs provided for by the legislation contain anti-avoidance provisions that are in place to counter ratification schemes for tax avoidance. Reliefs claimed can be clawed back or disallowed where the restructuring takes place for tax avoidance reasons. This article considers some of the anti-avoidance provisions below.

Bona Fide Test

The first instance where a potential clawback could occur is where the reconstruction or amalgamation was not effected for bona fide commercial purposes. Late last year, Revenue issued eBrief Issue 82/2015 which stated that Section 615 would not apply to a scheme of reconstruction or amalgamation involving the transfer of the whole or part of a company’s business to another company unless it is shown that the reconstruction or amalgamation is effected for bona fide commercial reasons and does not form part of an arrangement the main purpose, or one of the main purposes, of which is the avoidance of liability to tax. This applies to disposals occurring on or after 22 October 2015. Revenue in their eBrief have also stated that any case where a CGT charge cannot be imposed under normal CGT rules on the “true” consideration paid on the ultimate disposal of assets in respect of which relief under Section 615 has been granted should be examined to decide whether it can be challenged under the bona fide clause or under the general anti-avoidance Sections 811 or 811C TCA 1997 as appropriate.

Intra-Group Transfer of Assets

If a company is being sold and that company had acquired an asset previously from another group company and claimed intra-group relief on the transfer of assets, Section 623 TCA 1997 may apply so as to clawback the intra-group relief claimed previously. The conditions are as follows:

• a company which is a member of a group had acquired an asset from another member of the group,
• the company subsequently ceases to be a member of the group within 10 years after the acquisition while retaining the asset,
• at the time of acquisition of the asset the company was resident in the State or (in the case of a company which was not so resident) the asset was a chargeable asset in relation to the company,
  and
• at the time of acquisition the group company from which the asset was acquired was resident in the State or (in the case of a company not so resident) the asset was a chargeable asset in relation to the company.

Therefore, prior to any company sales, it may be necessary to carry out a detailed review of all intra-company transactions so as to ensure that it does not fall foul of Section 623.

Clawback of Reconstruction Relief

Section 625 TCA 1997 is an anti-avoidance provision which imposes a clawback of relief for corporation tax on chargeable gains provided by Section 586 and 587 TCA 1997. Section 625(1) TCA 1997 states that a clawback of CGT will arise where:

• “a company (in this section referred to as “the subsidiary”) ceases to be a member of a group of companies, and on an earlier occasion shares in the subsidiary were disposed of by another company (in this section referred to as “the chargeable company”) which was then a member of that group in the course of an amalgamation or reconstruction in the group, but only if that earlier occasion fell within the period of 10 years ending on the date on which the subsidiary ceases to be a member of the group.”

Where Section 625(1) (a) TCA 1997 applies, the company which disposed of the shares is regarded as having sold and immediately reacquired those shares at market value immediately before the “earlier occasion” (i.e. the occasion where the shares were disposed of to the other company). In this regard, the CGT that would have arisen to the disposing company is clawed back and the company that disposed of the shares is chargeable on this basis.

The requirements of Section 625(1) TCA 1997 can be broken down as follows:

• A clawback arises where a company ceases to be a member of a group; and
• Shares in that company were previously sold by another company in that group;
• The disposal was in the course of an amalgamation or reconstruction (on which relief was claimed under Section 586/587 was claimed on that earlier disposal) occurring in the last 10 years.

Where these conditions are satisfied, a clawback of CGT will arise to the company that originally sold the shares. Where the company that claimed the relief is no longer in the group when the clawback arises, the corporation tax will be payable by the principal of the group. References to a company ceasing to be a member of a group do not apply to cases where a company ceases to be a member of a group by being wound-up or dissolved, or in the consequence of another member of the group being wound up or dissolved.

It is therefore important to take note where companies have been inserted into the group by way of share for shares transactions or share for undertakings and these groups are now being broken due to a sale of the company, a CGT liability may arise on the earlier disposal. This liability would not have been anticipated at the time of the sale due to the operation of this section.

Prevention of Loss Buying & Capital Losses

Section 400 TCA 1997 contains provisions to counter the tax-avoidance device known as “loss-buying”. The effect of the section is to deny carry-forward relief for the unrelieved trading losses (and certain capital allowances) of a company where, in association with a change in ownership of the company, there is a major change in the activities of its trade or, at the time of the change of ownership, the company’s trade is near dormant. Therefore, it is important that if a company is being sold and that company has unused trading losses that there is no major change in the trade of the company following the sale.

Section 546A disallows capital losses if they arise from arrangements whose main purpose or one of the main purposes is to secure a tax advantage.

“Tax advantage” is broadly defined and means —

• relief or increased relief from tax,
• repayment or increased repayment of tax,
• the avoidance or reduction of a charge to tax or an assessment to tax, or
• the avoidance of a possible assessment to tax.

However Revenue has confirmed that this section will not apply where there is a genuine commercial transaction that gives rise to a real commercial loss as a result of a real commercial disposal or where the main purpose of the disposal was to secure a tax advantage.

Abnormal Dividends

Section 591A TCA 1997 prevents the avoidance of capital gains tax by a company on certain disposals of shares in another company. The capital gains tax is avoided where the company whose shares are being sold pays an abnormal dividend in connection with the disposal of the shares. That dividend is exempt in the hands of the receiving company because it is a dividend paid by an Irish resident company to a company that is within the charge to corporation tax. As a result of the payment of the dividend, a much smaller amount is payable for the shares, thus reducing the capital gains tax on the transaction.

The section provides that where there is an abnormal dividend paid to a company in connection with the disposal of shares in a company, the amount of the dividend is to be treated for tax purposes as proceeds for the disposal of the shares rather than a dividend. This ensures that the gain arising will be subject to capital gains tax. This section does not apply where the dividend was effected for bona fide commercial reasons and is not part of a scheme of which the main purpose is to avoid a liability to tax.

Conclusion

Prior to any sale or restructuring of a group, it is important that a detailed review of all companies and assets in the group is carried out particularly where a number of intra-group movement of assets and shares have occurred in the group and reliefs have been claimed. Board minutes should be drafted for all intra-group movements and the bona fide rationale should be outlined for all disposals in the minutes. Readers are reminded that when claiming any of these reliefs and savings, it is important to do so carefully and seek tax advice where necessary.

Úna Ryan, is an Associate Tax Director, Grant Thornton and specialises in group reorganisations and restructuring prior to sales.

Email: una.ryan@ie.gt.com